Commissioner's File: CIS 14402/96
Mr Commissioner Howell QC
11 June 1998
SOCIAL SECURITY CONTRIBUTIONS AND BENEFITS ACT 1992
SOCIAL SECURITY ADMINISTRATION ACT 1992
APPEAL FROM DECISION OF SOCIAL SECURITY APPEAL TRIBUNAL ON A QUESTION OF LAW
DECISION OF THE SOCIAL SECURITY COMMISSIONER
Claim for: Income Support
Appeal Tribunal: Lincoln SSAT
1. This appeal by the adjudication officer succeeds, as in my judgment the decision of the social security appeal tribunal given on 7 March 1996 was clearly erroneous in law. I set it aside and substitute my own decision that the claimant's weekly applicable amount for income support from 18 May 1995 is to include the appropriate figure in respect of interest on his mortgage advance of £85,000 from the Nationwide Building Society used towards the purchase price of his house, but not the additional £30,000 of mortgage liability described as a "further advance".
2. I held an oral hearing of this appeal at which the adjudication officer was represented by Mr Murray Hunt of Counsel instructed by the Solicitor to the Department of Social Security, and the claimant appeared and presented his case in person.
3. This claimant's story is another example of the financial idiocies of the 1980s. He was a solicitor in private practice who appears to have become involved in some ill advised property transactions on his own account, and came unstuck when in addition to a property he already owned subject to two mortgages totalling some £165,000, he bought a further property for himself on a probate sale for another £206,500, the whole of which he managed to borrow on a bridging loan from Lloyds Bank. In the spring of 1989 he switched this bridging loan to an even bigger liability with the Nationwide Building Society, increasing his liability on the second property to 95% of its supposed then value of £235,000, and taking his total indebtedness to some £400,000: a sum which it was or should have been apparent to any person who could add up that he was quite unable to service.
4. At about this time his partnership as a solicitor broke up in disagreements, and being without any significant resources of his own or provision against the consequences of the risks he had run up, he applied for income support and sought to have his mortgage interest paid for him. The income support authorities appear to have made what in my view was a wholly commendable and reasonable attempt to limit him to interest on the first of his properties, but he succeeded in getting this altered and having income support pay the interest on the whole of his Nationwide mortgage of £235,000, a liability on which he told me he had never paid so much as a penny to the building society by way of interest himself.
5. Because the liabilities for which he was responsible exceeded the amounts properly payable by income support even on the generous basis he had obtained, arrears continued to mount and his liabilities reached an even more unrealistic level. By the autumn of 1994 he was a debtor to the Nationwide alone for nearly £450,000, and one of his other mortgagees was bringing bankruptcy proceedings against him: see pages 11-22 of the case papers. With the concurrence of his creditors, a scheme was devised to stave off a bankruptcy, involving his agreeing to make a somewhat overdue move to a less expensive house on which the Nationwide agreed to give him a much smaller mortgage. This proposal, which was implemented, involved his existing property being sold at the best price obtainable and the proceeds used towards paying off his creditors, apart from a sum of £85,000 which would be used to purchase his new property.
6. According to the completion statement at page 5, the value of his existing property raised on the sale was under half the mortgage liability then secured on it to the Nationwide; and a second mortgagee with a debt of over £90,000 was left without any benefit from his security at all. The lenders had thus to acknowledge the inevitable and write off very large amounts of the liabilities the claimant had incurred to them: see the Nationwide's letter on page 13. That the lenders were fully alive to the only real source of any consolation for having got themselves into this situation is apparent from that letter and the letter from the bank's solicitors at page 17, which make it quite clear that everybody was contemplating that the interest on the claimant's new mortgage would be paid, for the benefit of them all, by the DSS.
7. This appeal arises out of the attempt by the Nationwide to salvage a little bit more for itself out of the wreck by insisting that in addition to the £85,000 mortgage granted to it by the claimant for the purchase price of the new property, a further £30,000 of liability to them should be secured on it by way of what is described as a "further advance", on which the whole arrangement was made conditional: see the offer terms dated 3 February 1995 at pages 32-35.
8. This "further advance" did not in fact represent any further advance made by the Nationwide to the claimant at all, but simply represented an attempt to recoup a further £30,000 of the losses they had already suffered by adding it to the security on the new house in case its value should in due course improve. The appeal results from the claimant's application to have the interest payable to the Nationwide on that further £30,000 of liability paid for him out of income support in addition to that on the £85,000 actually needed to buy his new smaller house, on the ground that the whole liability of £115,000 had really been the result of one transaction without which he would not have been permitted by the Nationwide to make the purchase at all: see the letter dated 4 March 1996 from his solicitors to the tribunal, at pages 36-37.
9. This argument succeeded before the tribunal on 7 March 1996: see the record of the proceedings at pages 43-45. The tribunal recorded at page 44 a finding of fact that the mortgage offer from the Nationwide of the £85,000 for the purchase price was conditional on his simultaneously taking up the further advance of £30,000 also secured on the same property. They held that in those circumstances the total loan of £115,000 fell within the permissible loans for which mortgage interest was allowable under para 7(3) Sch. 3 Income Support (General) Regulations SI 1987 No 1967 as then in force: principally because they considered the £30,000 liability to have been "applied for the purpose" of acquiring his interest in his new dwelling and so to qualify, in addition to the £85,000 which had actually been used to complete the purchase, under para 7(3)(a) ibid. Alternatively, they said that there "is also the possibility that the loan could be said to fit" within para 7(3)(b), which permits a loan to qualify where it is to defray money applied in paying off another loan to the extent that the other loan would have qualified under head (a) had the loan not been paid off. They concluded:
"In brief the only way in which [the claimant] could have purchased [the new house] was by obeying and following the requirements of the Building Society and this committed them [sic] to a total borrowing of £115,000. Therefore in our judgment the whole of those monies for the reasons set out above are eligible for housing costs".
10.Against that decision the adjudication officer appeals on the grounds set out in her notice of appeal at page 46 that the loan liability of £30,000 could not qualify under para 7 of Sch. 3, because it had not been used to acquire an interest in the claimant's new home at all: it had merely been added to the security in order to provide for the negative equity on the previous property. The purchase price of the new property had been £85,000, and it was only the loan for this amount which satisfied para 7(3)(a).
11.The claimant at the hearing before me amplified and relied on the submissions that had persuaded the tribunal, saying that as he had had a mortgage liability of £235,000 which was being paid for out of income support before the transactions in question, anything less than that was an advantage to his fellow citizens: and since the imposition of the additional £30,000 of liability on the new property had been an integral part of the transaction by which he had acquired his interest in it, it was allowable under para 7(3) in exactly the same way as incidental expenses of the sale would have been. He referred to a Commissioner's decision in case CIS 563/91 (*78/94) for the proposition that the money "applied for the purpose of acquiring an interest" in a property includes the necessary expenses of purchase in addition to the purchase price itself, and submitted that the extra liability added to his new mortgage was a "necessary expense of the purchase" in the sense that without it he would not have been able to buy the property at all. Furthermore, if he had not agreed to this extra liability being added to the security, he would not have been able to move home at all: and the whole of the £30,000 and a good deal more would have remained as part of a liability on which eligible housing costs were being paid in respect of his previous home on the £235,000 mortgage, a substantial part of which plainly by that stage represented negative equity so that there was nothing wrong in principle in income support being paid for interest servicing such equity.
12.I have carefully considered the written submissions in the papers and the detailed oral submissions made to me by the claimant at the hearing. However it seems to me that the adjudication officer's appeal in this case is unanswerable. In the first place I find it difficult to see how the extra £30,000 of liability added to the security on the new house can be described as a "loan taken out" on the new purchase at all. There was in fact no question of the building society making a loan or handing over another £30,000 in any real sense at this stage at all. All that happened was that out of the total sale proceeds of £172,000 from the previous house, the whole of which and more belonged to the Nationwide because it fell far short of the amount for which they were secured, the claimant's solicitor was permitted to retain £85,000 and apply it to the new purchase instead of paying it over to the lender with the remainder of the sale proceeds in reduction of the previous mortgage. The imposition of the further £30,000 secured liability on the mortgage of the new property simply reflected a decision that instead of the unpaid balance of over £200,000 due under the earlier mortgage, only the drastically reduced amount of £30,000 would be added to the security on the new house in order to give the claimant a more realistic fresh start, with the balance of unsecured liability for practical purposes having to be written off. The transfer of this part of the existing liability to the new property was not in my judgment the taking out of a loan for £30,000 in any relevant sense for para 7(3) of Sch. 3.
13.Even if that were not so, I accept as correct the two further submissions made to me by Mr Hunt on behalf of the adjudication officer, first that the additional £30,000 of liability cannot be described as "monies applied for the purpose of acquiring an interest in the dwelling" so as to bring it within para 7(3)(a) as an eligible housing cost on the new property; and second that it cannot qualify under para 7(3)(b) either.
14.As to (a), it is in my judgment quite clear that the restriction of loans under para 7(3) to those taken out to defray monies applied for the purpose of acquiring an interest in the dwelling occupied as the home, or to pay off another loan which would have so qualified, means that a loan only qualifies in so far as it is of money in fact applied in effecting the purchase itself or in discharging expenses necessary and incidental thereto. In other words, it is restricted to the payment or provision of the purchase price and the expenses of the sale and conveyancing costs: see decision CIS 563/91 at para 35, with which I respectfully agree.
15.The correct principle appears to me as stated by the Commissioner in the second part of that paragraph, that there is a distinction between money which has to be spent as a result of a precondition imposed by somebody else and the money actually spent in effecting the purchase itself. To take another example, if a mortgage lender made it a condition that a borrower should take out an extra loan at the same time to pay for a new car as well as a house, the amount spent on the car would not qualify under para 7(3) even though the house loan would not have been obtained without it: because the car loan money is spent on acquiring the car, not the house.
16.Secondly I accept Mr Hunt's submission that the transaction of providing additional or substituted security for £30,000 of pre-existing liability does not amount to "paying off another loan" so as to fall within para 7(3)(b); nor would it assist the claimant if it did, because the pre-existing liability had not been incurred for or applied in the purchasing of any interest in the present house.
17.For those reasons I allow the adjudication officer's appeal, set aside the decision of the tribunal as erroneous in law and substitute the decision given in paragraph 1 above.
P L Howell
11 June 1997
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